Commonwealth Numbered Regulations - Explanatory Statements

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CORPORATIONS AMENDMENT (SIMPLE CORPORATE BONDS AND OTHER MEASURES) REGULATION 2014 (SLI NO 209 OF 2014)

EXPLANATORY STATEMENT

SELECT LEGISLATIVE INSTRUMENT NO. 209

Issued by authority of the Treasurer

Corporations Act 2001

Corporations Amendment (Simple Corporate Bonds and Other Measures) Regulation 2014

Subsection 1364(1) of the Corporations Act 2001 (the Act) provides that the Governor-General may make regulations prescribing matters required or permitted by the Act to be prescribed, or necessary or convenient to be prescribed for carrying out or giving effect to the Act. Subsection 742(2) of the Act provides for regulations to be made in relation to financial products. 

The purpose of Corporations Amendment (Simple Corporate Bonds and Other Measures) Regulation 2014 (Regulation) is to specify the structure and content of the prospectus material when offering simple corporate bonds in the retail market.

The Act requires disclosure through a prospectus when bonds are offered for sale to the retail market.  The Act requires offers of simple corporate bonds in the retail market to be accompanied by a 2-part prospectus.  While the Act sets out the framework for the 2-part prospectus, the structure and content is to be specified by regulations.

The amendment is in respect of the provisions in Part 6D.2 of the Act, dealing with disclosure to investors about securities.

The 2-part prospectus comprises is to comprise a base prospectus and an offer-specific prospectus. 

Information that is required to be contained in the base prospectus is general information about the issuer and their bonds that is unlikely to significantly change over the life of the base prospectus.  The prospectus would contain information about what constitutes a bond offer; what information investors need to know about the bonds being offered; information about the bond issuer; the risks involved in investing in the bonds; other information relevant to investing in the bonds; and a glossary of key terms.

The offer-specific prospectus must contain information that is specific to the offer of simple corporate bonds that is material to a consumer's decision to invest in that offer of bonds.  The offer-specific prospectus would contain key dates and details of the offer of bonds and any other offer-specific information relevant to a consumer's decision in investing in the bonds.

Details of the Regulation are set out in the Attachment.

The Regulation is a legislative instrument for the purposes of the Legislative Instruments Act 2003.

The Act does not specify any conditions that need to be satisfied before the power to make the Regulation may be exercised.

Draft regulations were exposed for public consultation on the Treasury website from 21 October 2014 to 14 November 2014. 

Three submissions were received with one of the submissions being confidential.  The two public submissions, one from the G100 and one from the ASX, supported the proposed regulations.  Neither submission suggested changes to the draft regulations.  One submission sought a related change to the Act.  One submission sought access by larger borrowers to the simple corporate bonds prospectus regime. 

In accordance with the Corporations Agreement 2002, the Legislative and Governance Forum for Corporations has been consulted on the regulations.  No comments were received. 

The amendments to the Corporations Regulations 2001 would become effective on the same time as Schedule 1 to the Corporations Amendment (Simple Corporate Bonds and Other Measures) Act 2014, that is, on a date to be set by Proclamation or within six months of the day in which the Corporations Amendment (Simple Corporate bonds and Other Measures) Act 2014 receives the Royal Assent. 

ATTACHMENT

Details of the Corporations Amendment (Simple Corporate Bonds and Other Measures) Regulation 2014

Section 1 - Name

This section specifies the name of the Regulation as the Corporations Amendment (Simple Corporate Bonds and Other Measures) Regulation 2014 (Regulation).

Section 2 - Commencement

This section provides that the Regulation commences on the commencement of Schedule 1 to the Corporations Amendment (Simple Corporate Bonds and Other Measures) Act 2014.

Section 3 - Authority

This section provides that the authority for the Regulation is the Corporations Act 2001 (the Act).

Section 4 - Schedules

This section provides that the regulation has the effect as specified in Schedule 1 - Amendments.

 Schedule 1 -- Amendments

The Act requires offers of simple corporate bonds to retail investors to be accompanied by a 2-part prospectus.  A simple corporate bonds 2-part prospectus comprises:

•                 a base prospectus that contains general information about the issuer and their bonds that is unlikely to significantly change over the life of the base prospectus; and

•                 an offer-specific prospectus that contains information specific to an offer of simple corporate bonds that is material to a consumer's decision to invest in that offer of bonds.

Base prospectus

Regulation 6D.2.04 specifies the information required to be included in a base prospectus. Authority to amend by regulations the information and statements to be contained in a base prospectus is provided by subsections 713C(5) and (6) of the Act respectively [subregulation 6D.2.04(1)]. 

The information contained in a base prospectus however, is not limited to only that prescribed by subsections 713C(5) and (6) of the Act [subregulation 6D.2.04(2)].

A base prospectus must contain a table of contents that indicates where relevant material in the prospectus is located. The prospectus must contain information about what constitutes a bond offer; what information investors need to know about the bonds being offered; information about the bond issuer; the risks involved in investing in the bonds; other information relevant to investing in the bonds; and a glossary of key terms [subregulation 6D.2.04(3)].

To make it clear that the base prospectus does not contain all of the information relevant to an offer of simple corporate bonds, Section 1 of a base prospectus must include the following statements or statements to the same effect as the following statements.

•                 This document will be the base prospectus for these bonds for 3 years from the time it is lodged with the Australian Securities and Investments Commission.

•                 There will be a separate offer-specific prospectus for each offer of bonds during the life of this base prospectus.

•                 To make an informed investment decision about these bonds, you should read the offer-specific prospectus and this base prospectus before investing.

•                 This base prospectus alone is not an offer. The offer is contained in the offer-specific prospectus, this base prospectus and other information that is incorporated by reference into the offer-specific prospectus and this base prospectus.

•                 To find out more about the pros and cons of investing in corporate bonds, visit ASIC's MoneySmart website: http://moneysmart.gov.au [subregulation 6D.2.04(4)].

To assist investors better understand the key features of the issuer's simple corporate bonds, Section 2 of a base prospectus must contain, or reference if this material is already contained in a document lodged with the Australian Securities and Investments Commission (ASIC), details of the key aspects of the bonds, including: the interaction between the coupon rate and yield; the interest rate and term of the bonds; the maturity and redemption of the bonds; events that will constitute default; guarantees in relation to the bonds and information about any guarantors; and the security and ranking of the bonds [subregulation 6D.2.04(5)].

It is intended that information about the bonds contained in the base prospectus is general in nature, with detailed information relating to an offer of simple corporate bonds to be contained in the offer-specific prospectus.

To assist investors consider the timing of their investment in the issuer's simple corporate bonds, Section 2 of a base prospectus must also contain information, or a reference to the information if the information is already contained in a document lodged with ASIC, on the program of the bonds (if applicable), including any pre-planned future issues of bonds [subregulation 6D.2.04(5)].

Section 3 of a base prospectus must include information to assist the investor better understand the issuer and its business.  This includes referring investors to the most up to date information. In particular, Section 3 must provide the following information, or a reference to the information if the information is already contained in a document lodged with ASIC:

•                 brief information about the issuing body, including for example, a summary of their business, business strategy, management personnel including directors and senior managers, and governance arrangements;

•                 information about the trust deed relating to the issuing body and an explanation of the role of the trustee; and

•                 any additional information relevant to a consumer's investment decision, including for example, the issuing body's annual and financial reports, reference to any half-year report lodged with ASIC if one was lodged since the full-year report was lodged and where that information can be obtained [subregulation 6D.2.04(6)].

Financial information about the issuer is relevant to inform investors when determining to invest in an issuer's bonds.  Financial information about the issuer is to be provided through the issuer's key financial ratios, that is the issuer's gearing ratio, working capital ratio and interest cover ratio [subregulation 6D.2.04(6)]. 

Section 3 of the base prospectus must contain the gearing ratio, working capital ratio and interest cover ratio of the issuing body [subregulation 6D.2.06(1)].

The information used to calculate the ratios must be sourced from the issuing body's most recent financial statements, or if applicable, the issuing body's consolidated financial statements.  The requirement to source the information from the issuing body's most recent financial statement still applies where the issuing body's most recent financial statement is for a period of less than 12 months [subregulation 6D.2.06(2)]. 

The gearing ratio is calculated by dividing the issuing body's total liabilities by their total equity.  The working capital ratio is calculated by dividing the issuing body's current assets by their current liabilities.  The interest cover ratio is calculated by dividing their earnings before net interest expense, taxes, depreciation and amortisation (EBITDA) by their net interest expense.  Net interest expense means the interest expense net of interest revenue.  Net interest expense calculations must take into account any related hedging arrangements recognised in the profit and loss statements.  [subregulation 6D.2.06(3-5)].

To inform investors that the issuing body must publicly disclose further information than that contained in the 2-part prospectus, Section 3 of a base prospectus must also include the following statement or a statement to the same effect as the following statement.

•                 A publicly listed entity must release financial reports and continuously disclose information that may have an impact on its share or bond price. This information is available publicly on the relevant market exchange. You should consider this information when making an investment decision about bonds. While this information is important, it is not considered part of the disclosure document for the offer of bonds using this base prospectus [subregulation 6D.2.04(7)].

All investments contain a degree of risk that investors should consider before investing. Section 4 of a base prospectus must highlight the main risks of investing in an offer of simple corporate bonds. Specifically, Section 4 of a base prospectus must the following information, or a reference to the information if the information is already contained in a document lodged with ASIC:

•                 the main risks associated with the bonds and an explanation of the risks;

•                 the issuing body's main business risks;

•                 other risks specific to the bonds that may be relevant to a consumer's investment decision, including an explanation of the risks; and

•                 other business risks that may be relevant to a consumer's investment decision, including an explanation of the risks [subregulation 6D.2.04(8)].

Section 5 of a base prospectus must contain the following information, or a reference to the information if the information is already contained in a document lodged with ASIC, an explanation of the taxation consequences of investing in bonds; information relating to privacy and the issuing body's obligations under privacy laws; and any applicable selling restrictions on the bonds [subregulation 6D.2.04(9)].

Section 5 of a base prospectus must also include the following statements or statements to the same effect as the following statements.

•                 More information on the tax implications associated with investing in bonds can be found on the Australian Taxation Office's website: http://www.ato.gov.au.

•                 The following is a list of material referred to, but not set out in full, in this prospectus. However, the material (or relevant extracts of the material)is incorporated by reference and, as such, forms part of the offer of bonds covered by this prospectus [subregulation 6D.2.04(10)].

A base prospectus must also include a list of material referred to, but not set out in full, in the base prospectus [subregulation 6D.2.04(11)].

To assist investors better understand the terminology used in the prospectus material relating to simple corporate bonds, Section 6 of a base prospectus must include a glossary that adequately explains the meanings of terms used in the base and offer-specific prospectuses [subregulation 6D.2.04(12)].

Offer-specific prospectus

Regulation 6D.2.05 specifies the information required in an offer-specific prospectus.

Authority to amend by regulations the information and statements to be contained in an offer-specific prospectus is provided by subsections 713D(6) and (7) of the Act respectively [subregulation 6D.2.05(1)]. 

The information contained in an offer-specific prospectus however, is not limited to only that prescribed by subsections 713D(6) and (7) of the Act [subregulation 6D.2.05(2)].

An offer-specific prospectus must contain a table of contents that indicates where relevant material in the prospectus is located. The offer-specific prospectus must contain key dates and details of the offer of bonds and any other offer-specific information relevant to a consumer's decision in investing in the bonds [subregulation 6D.2.05(3)].

To make it clear that the offer-specific prospectus does not contain all of the information relevant to an offer of simple corporate bonds, Section 1 of an offer-specific prospectus must contain the following statements or statements to the same effect as the following statements.

•                 This offer-specific prospectus is not a summary of the information contained in the base prospectus.

•                 This offer-specific prospectus is only relevant for this offer of bonds.

•                 A base prospectus applies to this offer of bonds.

•                 This offer-specific prospectus provides offer details, key dates and other relevant information for the offer. The base prospectus for this offer provides additional information that is also critical to your decision. You should take all of the information in the base prospectus into consideration before making your decision in relation to this offer.

•                 To find out more about the pros and cons of investing in corporate bonds, visit ASIC's MoneySmart website: http://moneysmart.gov.au [subregulation 6D.2.05(4)].

To provide investors with detailed information about the terms and conditions of the bonds being offered, Section 2 of an offer-specific prospectus must contain the following information, or a reference to the information if the information is already contained in a document lodged with ASIC:

•                 information on the terms of the offer of the bonds, including: the name of the issuing body; the size of the series, or tranche, to which the offer relates; the face value, term, and maturity date of the bonds; guarantees in relation to the bonds and information about any guarantors; the interest rate of the bonds; interest payment dates; events that will constitute default; details of any existing security; the structure of the offer; the minimum size of an application for the bonds; and the prescribed financial market on which the bonds will be listed.

•                 a short explanation of the circumstances in which the bonds can be redeemed.

•                 any fees and costs associated with the offer of bonds.

•                 an explanation of where investors can obtain additional information about the offer, including for example, the contact details of the issuing body or a financial advisor or other professional advisor.

•                 information or reference to the selling restrictions, if any, on the bonds [subregulation 6D.2.05(5)].

In recognition that information contained in a base prospectus can change over time, an offer-specific prospectus must also update significant information contained in a base prospectus that has changed from the time it had been lodged with ASIC. This information, or reference if it is already contained in a document lodged with ASIC, must be included in Section 3 of the offer-specific prospectus, and must specifically include:

•                 any significant information necessary to update the information in the base prospectus;

•                 any notices that the issuing body has issued to explain changes that have occurred to the base prospectus since it was lodged with ASIC;

•                 the key financial ratios specified in regulation 6D.2.06, including details of any changes in the key financial ratios since the last offer-specific prospectus or base prospectus was issued; and

•                 an explanation of any changes to the risks disclosed in the base prospectus [subregulation 6D.2.05(6)].

Section 3 of an offer-specific prospectus must also contain, or reference if this material is already contained in a document lodged with ASIC, other information specific to the offer of simple corporate bonds that investors should consider, including:

•                 an explanation of how the issuing body will use the funds raised by issuing the bonds;

•                 a brief summary of the effect of the offer on the issuing body; and

•                 the ranking of the bonds and any other debt on issue.

To provide transparency in the fees those associated with the bond offer would receive, the offer-specific prospectus must include the amount paid, or agreed to be paid to: any directors or proposed directors of the issuing body; a person named in the prospectus as performing a function in a professional, advisory or other capacity in connection with the preparation or distribution of the prospectus; a promoter of the issuing body; or an underwriter to the issue or sale; or a financial services licensee named in, and involved in the sale of, the prospectus. 

Statement of Compatibility with Human Rights

Prepared in accordance with Part 3 of the Human Rights (Parliamentary Scrutiny) Act 2011

Corporations Amendment (Simple Corporate Bonds and Other
Measures) Regulations 2014

This Legislative Instrument is compatible with the human rights and freedoms recognised or declared in the international instruments listed in section 3 of the Human Rights (Parliamentary Scrutiny) Act 2011.

Overview of the Legislative Instrument

The Corporations Amendment (Simple Corporate Bonds and Other Measures) Regulation 2014 specifies the structure and content of the prospectus material when offering simple corporate bonds in the retail market.

Human rights implications

This Legislative Instrument does not engage any of the applicable rights or freedoms.

Conclusion

This Legislative Instrument is compatible with human rights as it does not raise any human rights issues.

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